What is Technical Analysis and How it Works
Technical analysis is a way to analyze price movements in order to benefit from trading stocks and commodities. How does technical analysis work?
Stock Analysis: Fundamental Analysis vs. Technical Analysis
The two most common ways of analyzing stocks are fundamental and technical analysis.
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Fundamental Analysis bis usually used to analyze the financial condition and value of a company. Fundamental analysis is used by stock investors. The following is an explanation of fundamental analysis: Fundamental Analysis Definition, How it Works and Tips.
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Technical Analysis is usually used to analyze the price movement of a stock. Technical analysis is usually used by traders (stock traders).
Technical Analysis Definition
Technical analysis can be interpreted as a trend or statistical probability approach to determine the price movement of a stock/commodity/asset.
Several things to note when using technical analysis are:
- Chart, which describes the opening price (open), closing price (close), the highest price (high), and lowest price (low).
- Trend, which describes the trend of price movements.
- Support and Resistance, which describes the range of price movements.
- Candlestick and chart pattern analysis, to identify patterns in trading.
- Indicator, as a tool to analyze price movements.
In addition to these five things, there are various technical analysis developments that can be used to analyze price movements.
Chart
A chart is used to determine the price condition of a stock, including the opening, closing, highest, and lowest price.
Usually, there are two charts used, namely Bar Chart and Candlestick
How to read a BAR CHART Here is how to interpret a BAR CHART
Example:
Remarks: a. Close price = high price and the price has increased. b. Open price = high price and the price has decreased. c. Open price = close price. d. Low price = close price and the price has decreased.
How to read a CANDLESTICK chart Here is how to interpret a CANDLESTICK chart
Contoh:
Remarks: a. Close price = high price and the price has increased. b. Open price = high price and the price has decreased. c. Open price = close price. d. Low price = close price and the price has decreased
Trend
A trend describes the tendency of the price movement of a stock.
Uptrend (Upward / Bullish) An uptrend describes the price moving 45° to the upper right (up). The price is above the trendline resistance.
Downtrend (Downward / Bearish) A downtrend describes the price moving 45° to the lower right (down). The price is below the trendline resistance.
Sideways (Flat) A sideways trend describes the price moving horizontally, between the support trendline and resistance trendline.
Support and Resistance
Support and resistance are used to determine the range of price movements. Support is like a floor (price below) and resistance is like a roof (price above).
Example: JPFA stock
Resistance 1 at Rp 1.395 Support 1 at Rp 1.310 Support 2 at Rp 1.265
Example analysis: Currently, the price is near support 1, so there is a chance the price will reverse upwards (towards resistance 1) or break support 1 towards support 2.
Therefore, traders can place a BUY slightly below support 1 by Taking Profit below a little R1 or Cut Loss a little below support 2.
Candlestick and Chart Pattern
Technical analysis is based on the idea that history repeats itself. A trader can analyze patterns that have happened before to determine the direction of price movement going foward.
Candlestick Analysis
Chart Pattern Analysis
Price movement patterns can form a continuous trend or a reversal trend. Here's an example:
Continuous Trend If there is a continuous trend, then the price that was rising will continue to rise. And conversely, prices that are falling will continue to fall.
Source: Know the 3 Main Groups of Chart Patterns. Babypips.com
Reversal Trend If the trend reverses, then the price that was rising will decrease. And conversely, prices that are going down will go up.
Indicator
Indicators are price analysis tools based on a statistical and mathematical approach. Several types of indicators:
Trend Indicators An indicator used to determine the ongoing trend, whether it is an uptrend (also called Bullish) or a downtrend (also called Bearish). Trend indicator examples: moving average, parabolic SAR (stop and reverse).
Example: Using the Moving Average on Bank BCA shares
Momentum Indicators An indicator used to determine the speed of price movement in a certain period. Examples of momentum indicators: Relative Strength Index (RSI), Stochastic Oscillator.
Example: Use of RSI on Bank BCA shares
Volatility Indicators An indicator used to determine the highest and lowest price movements of a stock. Examples of volatility indicators: Bollinger bands.
Example: Using the Bollinger Band on Bank BCA shares
Volume Indicators An indicator used to find out how strong volume and price movements are. A healthy price increase should be signaled by high volume. Examples of volume indicators: on balance volume, volume rate of change.
Example: Use of On Balance Volume on Bank BCA shares
Strategi Analisa Teknikal
Technical Analysis Strategy Some people combine fundamental analysis strategies with technical analysis, for example:
- Choosing a top-down analysis approach to determine which stocks to invest in and what the fair value of a company is (fundamental analysis).
- Determining when to buy and using averaging based on price movements (technical analysis).
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